"Teach a man to make cell calls, and he eats for a lifetime…"
— Matt McCall
Home run blockbuster companies have historically driven both the venture and entrepreneurial worlds. Large infrastructure plays (like Cisco) and service plays (like Amazon or eBay) have defined this landscape. However, with the tepid IPO market impairing exits for the venture and entrepreneurial worlds, VC’s are trying to rethink their models (e.g. Sevin Rosen). Furthermore, as in the computer world (chip speed–>bigger apps–>higher chip speeds), application waves follow infrastructure waves which then enable further application waves. We are clearly in the midst of an application wave (MySpace, YouTube, Web 2.0, etc) powered by the massive infrastructure spending on internet and wireless. Today, it is very consumer centric, but business centric plays continue to emerge (e.g. Innerworkings, Echo Global Logistics, etc).
While entrepreneurs often dream of large, game changing ideas in order to raise venture capital before eventually going public, most would be better off thinking of more immediate and applicable solutions. With technology as cheap as it is (open source, commodity hardware, ad models, etc), it does not take much to get a concept up and running. Since less than 5% of all start-ups get venture funding, most should be thinking about clear business models that lead to cash flow in a moderate amount of time.
They should also be thinking about applying technology to the myriad of processes and industries in their everyday lives which could be improved, if not revolutionized, by technology. The Economist gives a very basic example of this in Kerala, India. Sardine fisherman, when they bring in a good haul of fish, have to figure out what ports to pull into to sell their fish. Often, other fisherman have likewise been successful, and when they all descend on the same port, prices plummet and they end up with significant waste.
Robert Jensen of Harvard studied this and found that on one given day (like many others), 11 fisherman had to throw away their entire catch even though there were 27 buyers for the fish within 15km of the port he chose. In other words, they either a) chose the wrong port or b) were not able to contact the right buyers (just the ones at the doc).
Starting in 1997, some fishermen began to use cell phones to call in to ports to forward sell their catch. They surveyed the different ports, while still at sea, locked down their sale and then pulled into that port. Under the old model, if they chose the wrong port, they would not have the money (gas) or time to go to the next port. As a result of this, waste nearly disappeared and their profits grew over 8%.
Why do I mention something as mundane as a small sardine fishing village in India? Because it is mundane. Every part of your life has mundane processes and businesses that are inefficient or ineffective because of basic impediments. With the advent of technology, many of these go away. For most entrepreneurs, this is the best course of action. Use your specific domain expertise (or partner with someone who has it) to go after basic business and supply chain challenges, even if it includes taking on a principal role (e.g. being a retailer, distributor, etc). Technology enhanced business services will play an increasingly prominent role in entrepreneurship especially at high speed internet access and now cellular high speed service penetration continues to increase, thereby changing people’s behavior and adoption of it.
Look for situations:
1) that have significant cost & inefficiencies due to basic processes
2) where there are clear technology solutions that address these issues
3) where it doesn’t require dramatically changing people’s behavior
— this often means making your firm look like the others but you embed your technology internally
4) there is sufficient new profit from your application for a strong ROI
5) preferably, this technology helps create barriers or lock-in
Teach a man to make cell calls, and he eats for a lifetime…
Excellent post. A important reminder of the easy tests that can be applied to ideas. I believe the presence of an existing process is the best evidence of a real market opportunity. I’d rather focus on an existing process, including competing with the incumbent behavior(s) and player(s), than try to create a brand new process.
However, it would be interesting to compare the returns on investments in the incremental improvement realm vs. returns on investments in the new process realm.
Incremental plays tend to result in 2-4x returns on capital unless done with very small amounts of capital at low valuations. Big swing plays have much higher failure rates but swing between 0x and 10+x. Lot more visibility and fewer sleepless nights on the incremental but you are not changing the world or making as much of a statement. Both are key in the world of entrepreneurship…just depends on your stomach for risk.